Why the AUD/JPY is a great pair to trade…
Sometimes I find myself wondering, “Why am I trading this particular asset?”
Maybe it’s because I subliminally decide upon a pair that’s likely to have momentum…
Or I’ve seen something either in the fundamentals or technicals that is likely to provide momentum according to my strategy…
But there’s normally always a reason for it.
One pair that I actively aim to target in specific periods of market phasing is the AUD/JPY.
This pair can be classed as a “risk barometer pair” in the short-term.
Why is that?
Well, the Aussie Dollar is very much a commodity backed currency (so-called because the country exports a lot of commodities – metals, oil, grain etc.)
If there is an economic shock in a major global economy (apart from Japan), it’s likely that the Aussie dollar will fall in the short to mid-term.
At the same time, the Yen is very much a safe haven currency during economic shocks.
This means that Aussie is likely to get sold off, while Yen is likely to be bid on.
This creates two way momentum, where the price of the pair falls quicker – and it’s purely based on a change in risk attitudes in the market.
Take a look at the chart below. It shows how the 2008 financial crisis led to a move into the Yen and away from the AUD…
As the attitude to risk changed, combined with the availability of the carry trade, AUDJPY was bought again and again over the next 5-6 years.
More recently, this trade was ‘unwound’ – as you can see in the following chart:
This is where traders saw that there was a change in risk sentiment again and then wanted to get out of their positions.
The other reason that this pair moves in the longer-term is due to changes in the interest rate environment.
Remember I spoke about the carry trade a few weeks ago? If you missed me speak of that you can catch up here.
Well, AUDJPY is a great example of a pair that provides a ‘carry’ (where you earn from the interest rate differential) in both the short and mid-term.
Understanding a short-term change in the market is difficult to do… As there can be many reasons as to why it happens.
But when you start to think about all the potential reasons as to why a market may be changing its mid-long term direction (such as carry trade position changing), you can build a better picture in your head of what’s happening in the markets. And AUDJPY is probably the best currency to do it with.
Have a look at this pair and see if you can line up changes in this pair over time with changes in risk attitudes in the general market.
Where to find more great trading tips and ideas like this…
I’ve had a lot of feedback from Trading Point Pro members over the past weeks. And I’m pleased to say that I’ve had some really good feedback on the strategies and tools I’ve been showing you how to use to improve your trading.
Like the Volume Spread Analysis strategy I’ve created, based upon the work of Richard Wyckoff…
Or my advice to use ‘Stop Runs’ to see what’s going on in the markets…
Or the great strategy I sent you just the other week on how to trade ‘Inside Bars’.
But you guys want more…
Now, we’ll admit it… when I took over as your editor here at The Trading Point and on our premium trading service, Trading Point Pro, things weren’t exactly great…
While my predecessors knew a lot about the markets, you’d been a bit short-changed in the education department…
You know, the stuff you actually need to learn in order to be able to analyse the markets and spot winning movements.
So the first task I was set when I took over was to compile all my knowledge of the markets.
All of the stuff that I’ve learnt that enables me to trade the markets successfully from the comfort of my own home.
– How trading actually works, who to trade with and how to actually place a trade.
– What candlestick charts are and what different types of candle mean (yes, every single candle on a chart is a clue as to what is happening in the markets).
– How to spot patterns in the charts and trade those patterns for big profits.
And most importantly – I think – how to manage your money effectively so your losses are kept to a minimum and you can stay in the game for as long as possible.
So that’s what I’ve done. I’ve compiled information on all the strategies and tools I spent years learning myself in to one document.
Well, I say “document”… it started life as a document, but then my publishers here at Agora took a look at it and were so impressed by what it contained…
And how easy-to-read and easy-to-implement it was…
And how helpful it could be to anyone who wanted to really learn how to trade for themselves (they even said it could well be the “most important book their readers ever read”)…
They’ve decided to print and publish it as a hard copy book.
It’s almost ready for print – we’re just finalising the front cover. But I’m really excited about this… so I couldn’t wait to tell you.
If you want to learn everything you need to trade… you should be excited too.
And you should keep your eyes on your inboxes later this week, when I’ll let you know how you can pick up a FREE copy.
Yes, you read that right… a FREE copy!